How five years of rock-bottom interest rates have changed Britain

Five years ago this week, on 5 March 2009, the Bank of England took the dramatic step of cutting interest rates to their lowest level in more 300 years.

The previous 18 months had seen Northern Rock nationalised, RBS, Lloyds and HBOS rescued by massive taxpayer bailouts and Lehman Brothers collapse in the United States. House prices were falling, car sales plunging and Britain found itself facing a deep depression.

For a decade before the crisis the Bank had dealt in finely tuned adjustments, usually amounting to a scrupulously judged quarter point cut or rise. But in 2008 everything changed and it took just five months to slash the base rate from 5% down to 0.5%. And there it has stayed, with rate-setting committee member David Miles last week suggesting 5% would not be seen again for years, perhaps never.

Homeowners and businesses have undoubtedly been saved from repossession or administration, but savers have watched their savings growth dwindle to almost nothing as the UK adjusts to an era of low rates.

These are the effects on both winners and losers.

Mortgage payers

Homeowners with mortgages have been the big beneficiaries of record low rates, especially those lucky or canny enough to have had mortgage deals tied to the base rate as it plummeted. Many of those mega-deals have since ended, but there are still borrowers sitting on cheap standard variable rates and enjoying monthly repayments much lower than they signed up for. Six years ago, before the crunch, the average SVR stood at 7.24%; it is now 4.39%, with some paying as little as 2.5%. Even someone staying on an average SVR, with a £100,000 interest-only mortgage, will have saved a total of £13,300 over the past five years.

There will be many who without the rate cuts would not have been able to hold on to their homes at all. In the previous housing crash in 1991 there were 75,000 repossessions in a year, but this time the number hit only 50,000 in 2009, according to the Council of Mortgage Lenders, and quickly fell back. Last year there were 29,000, despite the squeeze on household incomes.

"We have had a recession and several years in which real earnings have not increased – things that are usually associated with a rise in arrears and repossessions," said Matthew Pointon, property economist at Capital Economics. "There's no doubt the low base rate has helped keep these down." As well as allowing people to keep up with mortgage payments, it had also effectively made it cheaper for lenders to exercise forbearance, he said.

Mortgages have been paid off more quickly, with the Bank of England's reporting that repayments have exceeded the withdrawal of equity by more than £10bn in every quarter since the summer of 2010. However, there is little evidence that people have been taking the chance to overpay and make inroads into their borrowing. With food and energy bills going up, some may have simply diverted any savings into paying for something else. Hilary Osborne

Savers

Britain's army of small savers, who outnumber mortgage holders by seven to one, have lost out on around £65bn in interest payments since the Bank of England slashed rates, according to consultants McKinsey. Save our Savers, a campaign group borne out of the financial crisis, reckons that the figure is even higher: "We calculate that savers have lost around £250bn through a combination of lower interest rates and above-target inflation."

But it is a peculiarity of the financial crisis that the lower interest rates have fallen, the more we have saved. In the dying days of the boom in early 2008, UK households were saving just 0.2% of their total income every month. But as the banks toppled and worries about job losses mounted, the savings ratio leapt to 8% within a year. It's a sign of renewed confidence that the figure is now falling again.

Throughout the crisis, British savers have sought safety first, preferring instant access accounts even at the cost of near-invisible rates of interest. The Bank of England reckons that rates have been so poor that savers have decided to keep their money in easy reach rather than locked away into accounts that pay little extra. Over the past two years alone, the amount kept in instant-access accounts has risen from £435bn to £525bn, while the amount in savings bonds has dropped from £281bn to £238bn. Money has also poured into cash Isas – up from £162bn five years ago to £227bn now.

In the early days of the crisis, banks desperate for cash kept interest rates relatively high despite base rate falling to 0.5%. The real pain for savers came when the government introduced Funding for Lending in July 2012, which gave banks access to cash and made them much less keen to offer competitive rates, said Anna Bowes of savingschampion.co.uk. Since then, rates on "best buy" instant access savings accounts have more than halved – and there's little sign of any respite for savers soon. PatrickCollinson

Businesses

The era of ultra-low interest rates has saved thousands of businesses and allowed many that would otherwise have gone to the wall to dust themselves down and repay their debts – but it hasn't made it easy for them to get a loan to expand.

Comparisons are hard to make with the early 1990s recession when bankruptcies quadrupled to 32,000, because 10 years ago the Labour government made it much easier to declare insolvency. But the figures show a continuing, gentle rise from 2004 without a 1990s-style jump after 2008.

Five years on from the crash, corporate profits are up, borrowings are down and official figures for the last three months of 2013 show businesses are investing again. The 0.5% interest rate and injection of £375bn into the financial system have also proved an essential support for consumer confidence. The downturn has seen a squeeze on incomes, but low rates have helped to prop up spending on the high street during tough times by freeing up consumer cash with lower mortgage rates.

But the combined efforts of the Bank and Treasury to increase lending to the corporate sector have failed.

Businesses that need cash to invest in new plant and machinery have found that charges levied by their banks remain high and come with stiff demands for collateral. Even with economic recovery taking hold, a small business owner with a sound business plan who wants a loan can still be asked to put his or her house up as security. Phillip Inman

Banks

Critics of the banks argue that they have been the chief beneficiaries of low interest rates because they can borrow money cheaply to lend out at a profit. But the picture is not that simple.

Banks can borrow for very short periods from the Bank of England, but get the vast majority of their funding from retail deposits or the money markets. "Bank rate", though it is used to price many loans, does not determine the rate at which banks can borrow.

Ian Gordon, banks analyst at Investec, said low interest rates have been bad for banks' day-to-day business because they squeezed the margin between borrowing and lending: "The bad news, most notably for liability [deposit]-heavy banks like HSBC and Standard Chartered, but also others including RBS, has been a marked impact on deposit spreads."

Building societies have been hit harder because many mortgage borrowers are on standard variable rates that are at rock-bottom.

Simon Ward, an economist at Henderson Global Investors, argues that lower rates were needed but that they went too low for too long: "If anything, low rates have hurt banks' profitability and delayed the recovery because the banks needed to rebuild their balance sheets [from profits] before they could lend again."

But matters could have been much worse. The Bank of England's view is that low rates were essential to prevent an economic meltdown and huge defaults by households and business borrowers. At his first big speech as Bank governor last year, Mark Carney said that many business loans were linked to the base rate and, until the recovery is in full swing ,rates should remain low. Sean Farrell